Liquefied Natural Gas: How It Affects the Energy Market

After hearing the news that our parent company, Centrica plc, signed a 20-year agreement to purchase liquefied natural gas (LNG), I thought it would be a great time to explain what LNG is and how it works. So, here goes nothing.

LNG is the result of cooling natural gas to about -260F, turning it from a gas into a liquid, coined liquefaction. Why cool natural gas to the point where it liquefies? If you want to transport it long distances and a pipeline isn’t available, liquefying the gas is the only option. The process increases natural gas’ energy density greatly, allowing it to be economically shipped. Countries that have few natural resources but strong economies, such as Japan, South Korea and Great Britain, are large importers of LNG. They have little or no domestic production and building a pipeline across large bodies of water isn’t feasible. These and other countries rely on LNG cargo tankers to supply their natural gas needs. The tankers resemble oil tankers but are specially constructed and insulated to carry the super cool LNG. The tankers dock at a terminal in the receiving country and a process called regasification takes place, or turning the liquid back into a gas so it can be injected into the pipeline infrastructure.

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New England Natural Gas Prices Spike

New England is experiencing some of the highest spot electricity and natural gas price spikes in the country with some more than $30 per MMBtu and $200 per MWh! You may not notice if you have a fixed price during the winter, but if you are buying spot gas or power, you are probably aware. If you are soliciting quotes for any term that includes a future winter, hopefully you’ve noticed the impact.

During the past month, a confluence of events has hit this region, conspiring to drive electricity and natural gas markets to three times their three-year average. The chart below shows the recent high prices and volatility. It also shows the Nepool Mass Hub (in blue, left axis, the main trading location for electricity in the New England region) and the Algonquin Citygate (in red, right axis, the main delivery point for natural gas in the Boston area).

Click here for chart: High New England Energy Prices

There are three main reasons that the markets for natural gas and electricity have been so strong in New England recently.

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Natural Gas/Electricity Price Correlations

In the electricity business, we talk A LOT about natural gas market. Where is the market going? What affects the market? If our business is mostly about electricity, why do we talk so much about natural gas? Simply put, the greatest driver of electricity prices is the price of natural gas. Let’s take a look at why this important correlation exists.

First, a significant amount of electricity that is generated in the U.S. comes from the burning of natural gas – historically it’s been about 20%. The rest comes from coal (about 50%), nuclear (about 20%), hydro-electric (about 8%) and renewable (about 1%). If 50% of all electricity generated in the U.S. comes from coal, why is the correlation between natural gas more important?  To answer that question, you’ll need to understand the order in which electricity generators are dispatched and how prices for electricity are set.

Click here to view a Gas Power chart. Continue reading to learn what it means.

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California retailers see positives ahead

Article from Platts Megawatt Daily, January 7, 2013, by Tom Tiernan

The retail choice market in California can grow only in small steps, but retail suppliers are hopeful that some recent regulatory changes and possible legislative efforts will improve market conditions in 2013 and beyond.

The retail choice load in California is limited by the cap that has been in place for several years, though a pair of retail suppliers have commented on the positive signs for competitive suppliers.

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Healthy Gas Storage at the Start of Winter

After the prior few weeks volatility, the market took a real breather and moved down only slightly this past week.  The market closed Nov. 2 at $3.554/mmbtu and at $3.503 on Nov. 9.  The market seems to have digested the impact of Hurricane Sandy and is now focusing on winter weather.  The forecast for the next month is fairly mild and has pressured pricing to move slightly lower.  Providing support to the market, and keeping it from breaking below $3.50, is the unknown of what the rest of winter weather will look like. Continue reading

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